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Commodities

What are the effects on commodity prices?

Investors often and prefer to invest in commodities that have similar laws as stocks.

You can most often read what affects individual commodities in our article.

Commodities include precious metals (gold, platinum), minerals (oil, natural gas, iron), but also agricultural products (wheat, coffee, cocoa, sugar). The final price of each of these types of commodities depends on various factors. From the weather, through the outage of mining fields to the discovery of new deposits.

The impact of bad weather on food commodities

Most commodities are affected by bad weather. It doesn’t have to be just extreme weather such as long droughts or rain, or storms or hail. It is enough for the temperature to be different than it should be and for the wheat not to germinate. Or one good July frost will suffice and destroy part of the wheat crop.

The same applies to other raw materials that do not grow in the Czech Republic, but we are dependent on them. For example, cotton, coffee, tea or sugar cane.

Substitution effect

If the price of coffee increases, which, for example, due to bad weather is produced less than in recent years, its price will rise. However, the market is responding by moving people from coffee to tea. In economics, this phenomenon is called the substitution effect.

Bad weather can also affect oil production. Once regular hurricanes arrive in the United States, oil ceases to be mined on offshore shelves. If this situation lasted for a long time, it could have a more significant effect on the price of oil around the world.

Reducing mining and depletion of deposits

The reduction in mineral extraction can occur for two reasons. One of them is the effort to cause an increase in the price of a commodity by reducing mining. This was achieved, for example, in the 1970s by countries in and around the Arabian Peninsula. The result was the so-called oil shock.

The price of oil and other minerals is also affected by the depletion of the deposits from which it is mined. Once one site is closed and another is not discovered or opened, there is a risk that the price of the commodity will increase in the short term. However, the price of a particular raw material can also be affected by its geographical location.

For example, Australia has one of the richest deposits of bauxite, from which aluminum is made. If bauxite deposits were depleted all over the world and not in Australia, Australia could begin to dictate prices for this important raw material. The same is true of the “drying up” of oil fields in Iraq, Russia, Venezuela or Nigeria. Although several other countries are extracting oil, the deposits in these countries are among the most important.

Commodity limits

One of the most significant restrictions in commodities is that they will one day be depleted. This may not only be the case for oil and other minerals, but also for agricultural production. Industrial fertilization gradually increases agricultural yields per hectare. However, such growth is not eternal. Due to the ever-growing population of the planet Earth, the growth of agricultural production will one day stop.

The turning point, which, for example, is called an oil break in oil terminology, awaits humanity somewhere in the future. Once that happens, oil production will decline from then on. It is important not only as a fuel and fuel, but also for the production of drugs or plastics.